Pattern recognition

Noam Scheiber has a problem with Simon Johnson’s excellent Atlantic article comparing the current US economic crisis with the stuff he came up against in emerging markets while at the IMF (Baruch would have linked to it when he read it but everyone else had done so already). Johnson’s point is that the US agencies setting economic and fiscal policy and “Wall Street”, the US financial elites, are at least intertwined, if not one and the same. Sustainable recovery and prosperity can only come with a fully functioning banking system, but neither the banks nor the government are willing to take the radical steps necessary to get there, involving as it will the end of the cosy cohabitation. It follows that a very good way of avoiding Japan-like stagnation would be a more forcible separation. Here Noam sees “leaps”. He writes

The logical chain is typically something like: 1.) I’ve seen corrupt elites prevent governments from resolving financial crises in emerging markets. 2.) The finanical crisis dogging the United States shares some features with emerging-market crises–for example, overleveraged institutions enjoyed an outsize share of corporate profits prior to imploding. 3.) Ergo, it must be the case that corrupt elites are preventing the U.S. government from resolving the crisis

This line of argument is specious, says Noam, because

Logically, it’s like saying: 1.) Cancer patients don’t get well when they’re treated by witch doctors. 2.) The top oncologist at Mass General has lost a few patients lately–some of them inexplicably, under mysterious circumstances. 3.) Ergo, the top oncologist at Mass General was practicing witchcraft. Maybe, but it would be much more persuasive if you could establish causality.

That’s a reductio ad absurdiam too far. WTF does he mean “establish causality”? This is the nexus between politics and money: shady backroom deals, campaign contributions in brown envelopes, veiled ultimata, unspoken shared tenets between colleagues. Every party to every transaction in this nexus has gone out of their way to make it as impossible as er, possible to “establish causality”. It’s simply how these things are done, and I would say holds true in every country. Noam is asking for an impossible standard of proof, a level of immaculateness we don’t need to attain in order to responsibly act either in investing, economics and politics.

Look, there’s such a thing as pattern recognition. My boss can do it: he’s been analysing stocks for years, and when he picks one, he always comes up with these totally bogus reasons for buying it. Yet his picks tend to work, and mostly not for the reasons he said they would. He doesn’t always know why he likes these companies, here and now, but something in his lizard brain, trained over years in associating I don’t know what, charts and fundamentals or something, and subsequent outcomes, sees the setup and tells him it’s going up. Steven Colbert is right, up to a point: it’s the gut. My colleague’s only problem is he thinks too much, but that’s an aside which has nothing to do with the issue at hand.

We have more than enough examples of economic crisis in recent history to have an adequate “pattern database” for associating certain setups and outcomes. In agency theory, we have a conceptual underpinning of how organisational groups or elites can influence economic outcomes. And people at the IMF like Simon Johnson have a practical understanding and experience of dealing with these issues at a nuts and bolts level. Noam Scheiber’s objections here seem based less on objective scepticism, more on hope and this terrible, deadly sense of hubris and exceptionalism that has proven America’s fatal flaw time and again this decade.

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7 thoughts on “Pattern recognition”

Also, err, the fact that the former Treasury Secretary used to head up one of the largest financial services firms… Doesn’t that create a link of some sort? If this happened in Russia, the Western press would be all over it.

But American businessmen who go into government, and then take actions to benefit their former employers or partners get a much smoother ride in the press. This probably has something at all to do with the fact that these businesses are major buyers of advertisement space in the media.

I mean, the WSJ is happy to make accusations of Putin’s links to Gazprom, based on one article by a commentator with an axe to grind, and says nothing about the links between Goldman Sachs, Rubin, Citibank and Paulson, and no one smells a rat? I mean, things are different in the States, because they do have reasonable transparency in government and an independent judiciary, but this doesn’t stop people getting away with things.

For instance, it’s now becoming clear that the Bush White House broke the law on torture, but the chickens are only coming home to roost under the next administration. Perhaps we will have to wait 8 years before the press and Congress are ready to take a good hard look at the TARP. I suppose one strength of the American system is that we can have some faith that the truth will come out eventually.

it’s not a grand conspiracy, it’s groupthink.
these guys like paulson and geithner came from the same group of people and they all think alike. it’s not grand conspiracy.
just like when politicians look at this crisis and think about their own careers. are they gonna do nothing or are they gonna look like they are trying their hardest to “save the system”? obviously, they’re gonna always try to do something.
as far as that guy from the imf, i read his conspiracy theory type commentary and what it amounts to is “if everyone would just get out of the way and let us imf people run things, all would be well.” but the imf solutions are almost always to devalue the currency and raise taxes. it doesn’t seem to have worked to well when they’ve tried it.

But Tom, while everything does come out in the US eventually, the real question is whether americans acknowledge it for what it is, which is the same type of crap that goes on elsewhere. There’s this sense that, if it happens in America, it’s somehow “different” — it’s not “cronyism” in the sense we saw in Asian economies, it’s finding the best talent to run government; it’s not a systemic inability to let bad banks go bust like we saw in Japan, it’s merely seeing the complexity and multiple-interdependency of the financial system; and of course, if we do it, it’s not “torture”, it’s merely enhanced interrogation.

yo, no-one thinks it’s a conspiracy, but it doesn’t have to be. The brother in law of the nephew of Suharto who owned the Indonesian finance company which financed construction with USD loans before 1997 didn’t think he was engaging in a “conspiracy” when he got a bailout from the government, it was just the way things got done on a normalised basis. And so GM and Citigroup.

Actually, lots of people think the US Treasury runs the IMF anyway. They may thus be forgiven for thinking them IMF people are indeed running this one as well. What they find interesting is that the US doesn’t seem to want the medicine they prescribe for others, in the form of spending cuts, tax raising, structural reform etc. Austrian solutions for them, Keynsian ones for us.

I merely note the juxtaposition here. I don’t know that it’s unjustified. Obviously the main difference is that the US runs the global reserve currency and the same policies may not work. Note though that the IMF track record is surprisingly good. Everywhere they did that stuff it actually worked out. Where did you have in mind for where it didn’t?

Every regime will try to justify its actions – the US administrations are much better at it, because they know that they will be held to account sooner or later. Putin and Medvedev also always have some sort of justification for their actions, but it’s much more crude, because they know it will never be tested. All politicians are sanctimonious and corrupt, but there’s a line, and I would rather have Western politicians who know they might be caught out eventually, than those who know that they can bully or kill any journalist who doesn’t toe the party line.

By the way, on the IMF: I used to work for the EBRD, and had a few ex-IMF colleagues. So I’ve seen how the US goes about these things. There’s no question that the US administration expects to control and command both the IMF and the World Bank (even though they are nominally part of the UN). And they do, to a great extent. One of the things about the IMF, though, is that by and large their staffers are very very bright people, generally brighter than the directors who are there to represent the will of the shareholder governments. So in many cases, the IMF is able to impose its view, by sheer intellectual muscle. Which means that in many cases, it’s more the US government falling in line with the IMF, which generally has better economists, and better information about what’s going on, especially outside the US.

I think we are arguing around the core point, though. I’ve just been reading a biography of Bakunin, and he would say that all these are just manifestations of the same structures set up to exploit the proletariat and peasantry. Putin, Obama, and Brown are part of the same cabal controlling the state, which is an organ of terror designed to alternately buy the silence of the masses, and intimidate them into compliance. Once people are in power, there’s a well established playbook to help them maintain and exploit that power.

The whole point is that is is not supposed t happen in America. America, presumably, was build on the basic principle of preserving individual rights and in such a way that these rights will be protected by building mechanisms to prevent buliding excess concentration of anythig (political, economic, etc.) that would threatne these individual rights.

Yet, we find out that, effectively, these concentrations have occured. Anywhere you look in the US, you see oligopolies that have been entrenched with the blessing of the government, be that in the financial sector, defense, pharmas, and so on. You can call them what you want, oligarchs, oligopolists. Its the same thing and you get the same result. Thus, the pattern has been recognized and this is where Johnson’s contricutions lies.